What is Modern Monetary Theory?

Modern Monetary Theory is, in one sense, just reality. In the other and more important discussion MMT is a simple ignorance of the original question being asked.

Modern Theory

The modern part of the theory comes from the fact that we’ve really only had fiat currencies these last few decades. Before the mid 1970s at least some sort of lip service was paid to the idea that the value of a currency was backed up by something or other. Usually gold – that’s after gold itself was the currency – or perhaps holdings of some other currency that was then ultimately back up by gold. That rather died when Nixon suspended the gold convertibility of the US dollar, the global financial system pegging exchange rates to the dollar at that time. So, given that we’ve only had this sort of money – it’s money just because a government says it is – recently, the theory is recent.

The Correct Part Of MMT

Government simply makes money up out of thin air. Given this MMT says that there’s no limit to how much money a government can make up out of that thin air. This is entirely and wholly correct. There are other subsidiary claims to be made but that’s the biggie and it is, as stated, wholly and righteously spot on the button.

Where MMT Goes Wrong

The error is in thinking that this then opens up new vistas of government activity. The thinking going that, if money’s not the limitation then there’s no – or less – limit on what government can do for us. That being the error – the art of managing government is in making sure that the things it attempts are limited. That it’s kept to that very small set of activities that not only must be done, they can only be done by government. A healthy and pleasant life is led by keeping the politicians in that box – not by telling them that there’s no limit to the interference they can make in our lives.

To Be Less Dyspeptic About Modern Monetary Theory

More accurately, MMT tells us that as money isn’t the limiting factor in what government can do – they’re right – then certain of the constraints upon government action then go away. For example, if there’s a bright idea about a Green New Deal, or Bernie Sanders is going to offer free college for all, the question “How will you pay for that?” doesn’t have any real relevance. Because government can just print the money, whistle it up on the computers at the Treasury, because that’s how money is created. We don’t have to use taxation to pay for spending that is, because we don’t need to collect taxes to pay for the spending. This is accurate and true too.

But If Money’s From The Federal Reserve, Then Why Tax At All?

The propounders of MMT aren’t entirely stupid. They might miss some important political points but L. Randall Wray, Warren Mosler, Stephanie Kelton, they’re not stupid. They do grasp the most basic points of money theory, monetarism, itself. If we go off and print money with gay abandon and then spend it into the real economy then at some point – when all resources are already being used to do something – then we’re going to generate inflation. Lots and lots of it, proportional to how much money we’re making and spending. We thus tax in order to suck that money back out of the economy and destroy it again, in order to limit the inflation.

More Formally About Taxation.

We generally divide into monetary policy and fiscal. Fiscal is those taxes and so on, monetary is interest rates and the money supply. MMT ends up as an odd blend between the two. We use fiscal policy – taxation – to control the money supply, we use monetary policy – the making of that original cash – to determine the fiscal policy of where government gets the money to spend from. The theory here says that because government creates the money in the first place then we’ve not got that original problem of how hard do we have to squeeze the population to get the cash to do things with? Thus we can print, spend, then worry later about inflation turning up. All of which is entirely true by the way.

The Problem With Inflation

The problem with the resultant inflation is, as they say, simply to increase taxation – to use fiscal policy to solve our monetary policy problem – to collect up that excess money. Sending it back into the Treasury or Federal Reserve computers destroys it, collapses the money supply and reduces the problematic inflation. Which it does, they’re correct. Standard money theory, standard monetarism, would agree. There’s no great mystery to MMT that is, it’s telling us things about reality out there which are true.

The problem being though, well, is that how politicians actually do things?

There’s Another Name For MMT – Monetisation Of Fiscal Policy

We can also call this monetisation of the budget deficit, of the government deficit if we like. This has a long history and most of the reign of Elizabeth I was taken up with solving the problems caused by her father, Henry VIII, doing exactly this. His specific thing was to add ever more copper to the silver in the coinage – this is back when money actually had some intrinsic value – meaning that he had more money to spend on his desires. This caused, as standard theory would suggest, significant inflation through the debasement of the currency. Elizabeth then struggled for decades to make the money to be able to call in the old debased money, to destroy it, and remint in actual silver so that the inflation was curbed. She actually did what MMT says we should do about inflation. And a very painful few decades it was if you were a taxpayer. Or, Spanish galleon captain which is where she and her pirates stole much of the necessary silver from. This might not be quite the policy for the modern world.

More Modern Monetisations Of Fiscal Policy

Several countries have recently resorted to the printing presses to pay for the nice things politicians desire. Over and above what it is that politicians always desire, either the votes or adulation of the people. Zimbabwe printed money until the last run of hundred trillion dollar notes – no, really – that came off the printing presses weren’t worth enough to go and buy the ink for the next run. Ink for banknotes being something that Zimbabwe did not produce, they had to exchange for real money to buy it. Argentina has spent the last century becoming – relatively – progressively poorer as successive governments realised they could print their way to retaining power. Venezuela has managed to take the nation with the world’s largest oil reserves and plunge it back a century in terms of economic development. Idiot socialism didn’t help either but that monetisation of fiscal policy, the printing of the bolivar to cover the government deficit, the fiscal deficit, was a major part of the idiocy. Note that this doesn’t have to end in hyperinflation, it’s just that often enough it does end in hyperinflation.

We Can Print Government Spending

It’s entirely correct that we can just print money and thereby cover government spending. There’s no – at base – need for government debt. In the short term this is what we do anyway. We don’t wait until the income tax receipts come in and only then pay for the gruel for the poor. Instead, we just tell the central bank to cash the government’s checks. Run an overdraft, if you need to print more money. The tax will come in over time to cover the government deficit and she’ll be right. Which is again entirely true. Deficit spending in the short term isn’t particularly a problem, in fact it’s normality. That’s just what does happen. Governments do indeed spend before they collect the tax to finance it.

So If MMT’s True Then What’s The Problem?

It’s the application of modern monetary theory that’s the problem, not the theory itself. Fiat money is just money made by governments, government can thus produce as much as it likes. Well, as much of its own currency as it likes that is. Rumour has it that North Korea tries to make dollars which is rather frowned on, even called forgery. Any resultant inflation can be taxed back – true and not the point at all. These truisms – tautologies even – are then used to back plans like the Green New Deal, or job guarantees, or to ensure full employment. MMT advocates like Alexandria Ocasio Cortez, Stephanie Kelton, are full of such proposals and the problem with them is not how they might be financed but whether they’re a good idea or not. The answer being that they’re not, they’re a significant crowding out of the private sector to the impoverishment of the future.

A Full Employment Guarantee

The sort of thing Kelton, Ocasio Cortez – often enough the likes of Bill Mitchell, Warren Mosler etc – have in mind is that there will be a government job for anyone who wants one. Bernie Sanders has made these sorts of noises too. A good job at good wages too. Say, $15 an hour plus health care insurance, decent vacations and a good pension. So, it’s to be expensive, so what, we can just print the money to pay for it! Which, of course, we can. But to what effect? Well, given that some 30 to 40% (it’s that high when we think about the benefits, not just the wage) of Americans currently make less than this then we’re going to have an awful lot of people taking those government jobs. Those government jobs will be doing what? How many diversity advisers does a country actually need?

Political Direction Of Labour Doesn’t Have A Good Record

The definition of peoples’ labour being well used is that it adds value. That is, value as defined by the people who get to consume the products of that labour. Utility is always and everywhere a personal valuation so a politician deciding that people will in fact value health care more than something else is going to be wrong. In fact, the current provision of health care to the American poor is valued by those poor at less than the cost to provide it to them. Even Census admits this – the poor would be better off by being given the money, not the health care. For what people want is often enough not what people think they should want.

Food Stamps

We see this with food stamps, or SNAP benefits. No, this isn’t about Trump’s limitation of who gets food stamps. Rather, we know there’s a black market in them and the going exchange rate is some 50 cents real cash for $1 on a SNAP card. People are valuing the food money as 50% of the value of real money. That is, politics decides that they should value money for food at, well, at the cost of giving it to them. Actual people value that food money very much less. No, this isn’t about drugs either, the most common purchase with cash made by selling food stamps is diapers. Politicians think people value food, people actually value dry and smiling, happy, babies. What fools the people are, eh?

So, That Job Guarantee

If the politicians get to direct what 30 to 40% of the labour force do we’re not going to end up with the jobs people want to get done being done. Simply because we’re going to have the political direction of 30 to 40% of the labour force. We’re not going to end up with the White Sea (Belomors) Canal being dug by hand again, true, but we are going to have an awful lot of grievance advisers and finger puppets for bored children. Because that’s the sort of thing that politicians will spend our resources upon. Bernie Sanders is actually on record as stating that it’s terrible that America has 18 or whatever forms of antiperspirant. Well, that rather shows that the people like variety in antiperspirant, Bernie doing the determining of who does what, who produces what, is going to diminish the production of what people want, isn’t it?

The Green New Deal

The Green New Deal can most assuredly be paid for with MMT, money printing. But the GND is something that shouldn’t be done anyway. Every economist that has even glanced at the problem of climate change has insisted that we shouldn’t be dealing with it through some vast plan. Through government deciding what to do with what technology. Instead, the insistence has been that we’re over the Hayekian limit of knowledge here. The best we can do is to change prices in the market, so that all decisions include the social costs of carbon. Then allow the economy itself, the only calculating engine we’ve got capable of the task, the chew through it. That is, we need a carbon tax, not a plan.

The truth of this should be obvious. Back 15 years the first generation of biofuels was the solution propounded by Friends of the Earth, Greenpeace and the rest and codified into law. That’s how we’ve got all that ethanol floating around. Currently, FoE, Greenpeace etc are against biofuels as it has become apparent that they increase, not decrease, CO2 emissions. We need prices, not plans, to deal with climate change – therefore, not the Green New Deal.

That is, MMT Makes Bad Plans Possible

By lifting the limits on political expenditure we’re actually allowing politicians to do more bad things to us. So, while MMT is correct in its description of money creation and the interaction with government budgets and government deficits it’s not actually a useful political, as opposed to economic, theory. Not that Paul Krugman has actually said this so far but I suspect it’s why Paul Krugman is less than enamoured with the overall theory. Even he doesn’t think that using the federal government to directly do more is a good idea. He does, as he’s often said, think that using the federal government to increase the social safety net is a good idea but not so much actual direct planning of major parts of the economy.

MMT Background

There are the modern day prophets of the theory, L. Randall Wray, Stephanie Kelton – Bernie’s chief economist at one point – Bill Mitchell. Moneybags himself, Warren Mosler. There’s Richard Murphy bandwagon hopping as usual. But it’s not as new as all that, we can see elements of this in John Maynard Keynes for example. One of his errors in General Theory was the idea that government should do more of the planning and investing in an economy. He didn’t live long enough to see how the non-market economies worked out with that. Keynes was, on that point, disproven by reality. Other snapshots can be seen in the work of Abba Lerner. Wynne Godley’s sectoral analysis makes an appearance often enough. There’s an entirely respectable background to all of this – added to that thought that the basic nuts and bolts are correct.

Use In A Financial Crisis

There is, obviously enough, the thought that perhaps MMT would be useful in a financial crisis. At which point we need to go head to head with Milton Friedman. Who pointed out that governments do in fact just make up modern money and if we’re in a significant crisis we can make some more and give it away. Helicopter money he called it, as if it were just being thrown out of a helicopter and people went and spent it. The important point here being of course that it’s people who go and spend it, not politicians. The printing money part is just fine – in extremis, where we might be facing deflation. But who gets to spend it matters. The economic adviser to whoever won the last election? Or the people themselves?

The Last Financial Crisis

Anyone recall what did happen the last time around? Obama was able to conjure up some $800 billion as stimulus for the economy. Not enough according to certain Keynesian calculations but still a considerable sum. It should have boosted economic growth substantially at least. As it happened it had no effect on economic growth. Because it didn’t really get spent. There was this idea that it would be spent upon shovel ready infrastructure projects. None of which existed – the modern world demands so much in the manner of planning, permissions, public hearings and the like that there just isn’t anything at all we can start building in under two years. Which is why no shovel ready projects were ever found. Thus Friedman’s idea is going to work better – just give the money away to people and let them spend it.

The Point Of Functional Finance

It is useful if functional finance actually is functional. So, as above, we should think through whether allowing the politicians not to spend money in an emergency is better than allowing the people to actually spend it. Fortunately, last time around we also tested this. Checks of several hundred dollars were sent out to every household – these tended to get saved, or to be used to pay down debt. That doesn’t boost economic growth and get us up out of the recession, the emergency. But smaller amounts – those that came from temporary cuts in FICA were spent. It turns out that Ricardian Equivalence only holds for decent sums of cash in one lump sum. Bits and pieces get spent. So, helicopter money it is next time, not infrastructure financed by money printing.

Medicare For all

A current insistence is that MMT can be used to pay for Medicare For All. Sure it can, why not? Well, actually, so can any other method of fiscal policy be used to pay for health care for all. There’s nothing special about monetisation of fiscal policy here. The actual question is whether Medicare is the right economic model for health care which, of course, it isn’t. Which is why it isn’t going to happen either, whichever way it is financed. Health care policy is health care policy that is, the economic policy of how to pay for it being something else. And a different economic policy doesn’t make a specific health care policy model correct or not, they’re independent questions. It’s like asking whether the new road should be paid for with 10 year or 30 year government bonds. No, first we’ve got to consider whether the road is a good idea. Which, even whether, government bonds doesn’t change that first necessary decision.

But Here’s The Real, Real, Problem With Modern Monetary Theory

So, think on it a moment. Imagine all of the above critiques have no value. MMT really is it. OK. Now think through to the end state. We’ll get lots more government spending – as the MMT proponents insist the the post-Keynesian theory allows. As that spending bumps up against the limits of real resources we’ll get inflation that must be curbed by higher taxation. What’s our end state here? An economy with more government spending and no tax cuts, actually, we’ll end up with a high tax, high spend economy. Which is exactly where we’d get to if we raised taxes and government spending in the first place. And also which a majority continually votes against. All of which does make it not a very new economic theory, nor even a very useful one. Our end point would be exactly that economy that the voters of the United States continually reject. So, err, no, right?

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Kevin Anthoney
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Kevin Anthoney

MMT is what happens when you let accountants do economics. Accountants are interested in balancing the books and – it’s true – you can keep the books balanced while using MMT. However, economists are interested in resource allocation, and understand that money is only a proxy for the resources available – increasing the amount of money does not increase the amount of labour, capital, etc. that you can call on. Printing money does not mean you can do more than you could before, and so does not work.

Rob Moss
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Rob Moss

If you want to nip a recession in the bud, just suspend National Insurance contributions on any income earned below the median wage for a month or two.

timworstall
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timworstall

I might even be the modern originator of that – Keynes said it first of course.

Boganboy
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Boganboy

Wars have been financed this way since – well – money was invented. As you point out, whether MMT works depends on whether what the money’s being spent on is a good idea and also that you don’t print too much. My favourite is the French expenditure on WW1, WW2 including paying for the German occupation (since the Germans controlled the printing presses), the Indochinese and Algerian wars, and of course the French nuclear program. Only the French nuclear program really worked, so the banksters and Eurocrats naturally insisted that the money printed to finance it was backed up by… Read more »